IN our second article, published in The National on April 9, the Scottish Banking & Finance Group (SBFG) argued that our money must be designed and used for the benefit of the people, and to support the creation of real wealth by producing the goods and services we all need individually and collectively to live well and in harmony with nature.

We went on to say: “If we fail to reform our financial system our new currency will, by default, be a ‘bankers’ currency’ ... and “Scotland will certainly need banks, bankers and other financial institutions but not of the kind we have been used to because those institutions have engendered a system which has failed, and will continue to fail, to allocate enough capital for useful purposes.”

In this article we want to explain what we mean by a “bankers’ currency”.

A monetary and currency system functions within a framework of institutions and law which governs how they interconnect and how they are managed.

A “bankers’ currency” is one in which the creation of money is delegated by the state to private commercial banks who create money in the form of credit. Decisions about the purposes that credit is provided for are left to these banks, although the degree of autonomy they may exercise can be constrained to some degree by rules and regulations. Private banks are governed in the interest of their shareholders and are managed to achieve the maximum level of profit at the lowest level of risk.

Private banks are risk averse so they pursue the easiest means to make their shareholder profits. Providing capital for investment is business is risky so the vast majority of bank lending is directed towards financial assets and property speculation.

Here are some enlightening statistics of total UK bank lending in 2014:

Lending to non-finance sector:

Mortgages – £1.06 trillion

Consumer credit and other household lending – £0.11 trn

Business lending – £0.43 trn

(of which commercial property £0.17 trn)

Government lending – £0.01 trn

Total lending to non-financial sector – £1.61 trn

Financial sector transactions – £5.53 trn

Total assets/liabilities–£7.13 trn

*Source: Bank of England Bankstats 2014, quoted by John Kay in his book “Other People’s Money” (page 179)

Of the £7.13 trn total bank lending, only 6% consists of lending to business. This symptomatic of a “bankers’ currency”. A New Economics Foundation paper in four years later “Credit where it’s due”, confirms nothing had changed by 2018 –

Financial sector transactions involve the buying and selling of fixed income securities (bonds), currency and commodities (FICC), and trading in derivatives such as “credit instruments”, “swaps” credit default swaps (CDSs), contracts for difference (CFDs).

All of this activity is a complete mystery to most of us and the jargon impenetrable. This is the world and the language of the high priests of finance who hold politicians and the rest of us in thrall to them.

This is the character of our current banking system that needs to be addressed if Scotland is to succeed in developing our productive capacity.

Proposals for reform do not imply the complete eradication of private commercial banks, but do require changes which increase the diversity of type and sizes of banks and a greater role for state owned banks in the providing of capital.

Ending the monopoly over credit creation, which a small number of private banks currently enjoy, is necessary, but this form of bank still has a role to play within a more diverse banking system if it is willing to adapt.

A factor which drives commercial banks to seek easy, lower risk returns from mortgage lending is that lending to business carries greater risk and uncertainties, with a higher risk of default in repayment of loans.

Where such lending does take place, banks seek to compensate by seeking a higher level of return on their own equity capital from securities trading in financial markets. It was this process that played a critical role in producing the conditions which led to the global financial crash in 2008.

A possible solution to this credit risk problem is for the institutions of government and the central bank to supply guarantees against default, particularly where the lending has been for productive purposes.

One of the important functions of Scotland’s central bank could be the provision for credit risk insurance to all private-sector banking institutions, whether they are commercial banks, regional, local, mutual banks or credit unions.

We will discuss how such a credit risk insurance system might work in a later article. For now it suffices to say that the Bank of England currently incorporates a function of this type as a means to fulfil its remit to provide financial stability.

In our next article we will discuss how Quantitative Easing (QE) plays a part in sustaining a bankers’ currency.